Last week Washington received a wake-up call to end its heated battle over the U.S. debt limit. According to estimates from the U.S. Treasury the government will run out of money to fund its affairs by August 2 nd , unless Congress passes a law to raise the $14.3 trillion dollar debt ceiling. The normally routine lifting of the debt ceiling has become embroiled in a deeply partisan political battle pitching Congressional Democrats against the Tea Party faction of the Republican Party. And while politicians bicker, investors are becoming increasingly skittish as they reason that this political version of the game of chicken has serious repercussions for the economy.

Bankers, creditors, investors and rating agencies have taken a dim view of America 's indebtedness and intransigence over the debt ceiling. Last week, rating agency Standard & Poor's warned that it might cut the U.S. credit rating within three months, citing “increasing risk” of a policy deadlock beyond any agreement on the debt ceiling. A day earlier, Moody's Investors Service warned it was also considering a downgrade to America 's triple-A credit status, citing the failure of politicians to make the unpopular decisions necessary to narrow the U.S. budget deficit. A ratings downgrade could worsen the country's budget deficit, rock investors' confidence in the U.S. as a safe haven, resulting in sharply higher interest rates, which would raise the government's future borrowing costs. America 's already faltering economy would be sent reeling from a ratings downgrade which would likely swell the ranks of the unemployed.

China , America 's biggest creditor with more than $1 trillion in treasury debt, also sounded the alarm, warning Washington to adopt responsible policy; while Ben Bernanke, the chairman of the Federal Reserve, weighed in on the matter calling the failure to end the deadlock a “self-inflicted wound.”

At the heart of the dispute is a deeply divided Congress split along party lines, with the Democrats proposing a mix of spending cuts and taxes increases while Eric Cantor's Tea Party faction of the Republican Party has opposed any deal on the debt ceiling where taxes are raised. To the Republicans the argument that tax cuts are sacred is a political winner and is a crucial element in drumming up votes and campaign contributions. Conservative talk-radio host Rush Limbaugh recently warned that if congressional Republicans agreed to more taxes “you can say good-bye to the Republican National Committee,” which would implode as donors fled the party.

But a consensus has emerged amongst economists and serious experts that the U.S. has a chronic long-term debt problem that can only be addressed with cutbacks in the growth of entitlements and with higher taxes. Faced with an aging population and stagnant revenue growth, the big entitlement programs such as Social Security, Medicare and Medicaid are the main culprits in an expanding U.S. debt trajectory.

One beneficiary of the mayhem in Washington and Brussels has been gold, which has closed in on $1,600 an ounce. Investors have turned to gold as a haven from the growing financial turmoil and uncertainty surrounding the economic health of the world's advanced economies. Gold is also attractive as an alternative to volatile currencies and as a hedge against inflation, which many see as a serious risk if the U.S. resorts to printing ever more currency in its quest to provide further economic stimulus.

Central banks around the world have sought to bolster their holdings of gold, with their purchases so far this year surpassing the level for all of 2010. For more than two decades, central banks were net sellers of bullion, but lately they've turned decidedly bullish on gold. And no wonder. With European officials scrambling to figure out a way to prevent Greece 's runaway debt from sinking the entire euro region and U.S. politicians engaged in non-stop brawling over the debt ceiling, many have begun to lose faith in the value of paper currencies and are increasingly turning to former currencies such as gold, silver and other precious metals.

Central banks, led by the Mexican central bank have helped make gold the best performing commodity of the second quarter. While other commodity prices have fallen as concerns have mounted over the slowing global growth, gold has been on steady climb so far this year. Gold has outperformed major bond, equity and commodity indices over the last three months.

For my money, gold and gold miners should be a mainstay of any portfolio. With U.S. politicians taking their economy to the brink and the possibility of a third round of stimulus spending still on the table, gold is poised to reach $2,000 per ounce and beyond. In a world gone mad, gold a traditional safe haven is once again about to take center stage.

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